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Europe’s energy woes fuel leaders’ populist fears

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European politicians returning to their desks after a summer break have found a pressing problem in their inbox — a cost-of-living crisis already fomenting social unrest. 

While many Europeans were enjoying the summer sun, protests were also percolating across the bloc, from Spain to Germany. In Prague last weekend, an estimated 70,000 people took to the streets to demonstrate against the government, demanding action on rising energy costs — and chanting against the EU and NATO.  

Europe is battling record inflation, largely a product of the energy costs that have ballooned since Russia invaded Ukraine. The toxic brew has left Europeans fearful of an exorbitant heating bill this winter. Some companies — from steel producers to fertilizer plants — have even shut down already. The situation has grown dire enough that the European Central Bank on Thursday announced its largest ever interest rate hike, and it promised more increases are on the way as the bank tries to curtail inflation, which is often described as a “tax on the poor.”

EU leaders across the Continent are worried. 

“The current energy crisis is making all political leaders nervous because they fear the political consequences,” one EU official told POLITICO this week as the political season got underway in Brussels. “In a lot of countries, this is about the survival of their governments. The resilience of Europe will be tested in all EU countries.”

It’s a fear outgoing Italian Prime Minister Mario Draghi was warning about at the G7 summit in June: “We must avoid the mistakes made after 2008, the energy crisis must not produce a return of populism.”

A diplomat from a Baltic country predicted Europe may face a fresh populist surge if leaders can’t rein in costs.

“This might be the third wave of populism in recent times,” he said, citing the financial crisis of 2008 and the migration crisis around 2014 as the two prior waves. “This time could be the worst and have unpredictable consequences. We also believe that this is what Putin is pushing for.” 

Underscoring leaders’ anxieties is the possibility that rising prices could undermine public support for the war in Ukraine, leaving European leaders with a poison-pill question: Are they prepared to risk their own jobs to save Ukrainian democracy? Hungary has already signed a new gas deal with Russian energy giant Gazprom and Bulgaria is considering a return to buying Russian gas, showing the limits to European solidarity with Ukraine. 

“This winter has turned into a sort of boxing match” with Moscow, argued a Western European diplomat. “The first one that falls has lost the game.”

The election in Sweden this Sunday will be the first test of the political temperature in Europe, and EU officials are watching closely. 

With crime and cost-of-living issues front and center in the election campaign, Prime Minister Magdalena Andersson’s center-left government could be in trouble. And the far-right Sweden Democrats party, which has neo-Nazi roots, has a realistic shot of forming part of a right-wing government — a first for Sweden.

But the real concern is Italy’s general election later this month. Giorgia Meloni’s far-right Brothers of Italy party is leading the polls, prompting expectations of a right-wing government in Rome.  

Given the size of Italy’s economy — the EU’s third largest — and its status as a founding EU member, the ramifications of a Meloni premiership would be profound, even though most officials do not expect her to tear up her predecessor’s economic plan, meant to ensure Italy receives billions in EU pandemic recovery cash. 

But Meloni’s ally Matteo Salvini, leader of the League and the other far-right party in the potential coalition, has openly promoted Russia-friendly stances. He called this week for the EU to rethink its sanctions against Russia — igniting fears in Brussels that new measures against Russia will grow more difficult if a Meloni-Salvini alliance takes power. 

A possible populist wave is not just confined to certain countries. Every European leader is under pressure from voters to contain spiraling costs. That’s one reason the European Commission decided this week to break with decades of precedent and push for radical intervention in the bloc’s energy markets. 

European Commission President Ursula von der Leyen surprised many officials in Brussels on Wednesday when she publicly detailed a multipoint plan to curb energy prices. The announcement came before top EU ambassadors had even been briefed, and ahead of von der Leyen’s State of the European Union speech next week — a platform many expected her to use to unveil the plan. 

A big reason for the accelerated timeline: rising pressure from political leaders. 

Belgian Prime Minister Alexander de Croo put it bluntly last weekend: “If the European Commission does not intervene, we risk a deep recession with unpredictable consequences. This is about much more than economics. This is about security and stability on the European continent.”

Charles Michel, president of the European Council, which represents EU members’ position, also voiced alarm in an interview with European media last week. 

“There is not a day to lose,” he said, pointedly stating the Council had invited the Commission several times to offer concrete proposals.

In the arcane world of energy policy, the Commission’s decision to intervene in the energy markets is a screeching u-turn. 

The EU’s executive arm has refused for decades to tamper with European energy markets, a view shared by economically liberal countries like Germany, the Netherlands and northern members. But the sheer scale of the economic pain citizens are feeling from Sweden to Portugal has forced normally free-market supporting countries to change tack and accept that an intervention is needed, albeit possibly only temporarily.  

Among von der Leyen’s proposals are a price cap on Russian gas, a plan to snatch excess profits from non-gas energy producers (who benefit from how EU electricity is priced) and a “solidarity contribution” from fossil fuel companies raking in record profits.

The final shape of the legislative proposal, however, is still in flux, with energy ministers due to give their initial verdict at an emergency meeting on Friday.

As energy ministers gather, the EU’s finance ministers will also meet to discuss the flip side of a major energy intervention — how to pay for it.  

Though the Commission’s proposal envisions compensating hard-hit consumers and businesses through the levy on non-gas electricity producers, it remains unclear if that approach would cover the massive costs involved. 

The German government has already unveiled a hefty €65 billion compensation package for consumers and businesses, and other eurozone countries are devising similar ways to cushion the blow as they prepare their national budgets, which all ultimately need Brussels’ approval.

Determining the “fiscal space” available to finance ministers will thus feature heavily in Friday’s meeting. EU finance officials are keeping a close eye on the eurozone’s economic health amid alarm bells about a possible recession. Having already thrown money at workers and citizens during the COVID pandemic, officials know they are walking a fine line. But the Commission is also well aware of the political pressure coming on EU leaders.

“There is a strong political wind blowing,” said one senior eurozone finance official ahead of Friday’s gathering. “We are doing our best to lean against it and prevent excesses from taking place. But realistically … of course, we understand there are some political imperatives which countries will have to follow.”  

Meanwhile, Friday’s meetings are likely just the opening salvo in a highly technical — and political — economic battle. Resistance is already building to von der Leyen’s proposal, with some officials lowering expectations for any breakthrough on Friday. Others are more optimistic, hoping at least for an indication of some political agreement on the horizon.

A legislative proposal will most likely be presented when von der Leyen gives her annual State of the European Union speech, a set piece on the EU political calendar. And once the legislative texts are on the table, many key details will start to come into focus, paving the way for a potential agreement.

But with political leaders across the Continent facing an increasingly desperate electorate, there’s only so long officials can wait.

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